Tim Bond: stranded China assets could be a hazard

Odey Asset Management's Tim Bond is concerned that 'stranded' China assets could become a 'hazard'.

Bond (pictured), who runs the long-short global macro Odyssey fund for Odey, said China faces a very delicate balancing act as it attempts to reshape its economy.

'China is trying to move to a service and consumption led model,' Bond explained in an interview with Killik.

'The move away from an old capital intensive model leaves what we regard as stranded assets, which not only no longer have a business rationale - half of the steel industry may close - as the rate of investment in infrastructure slows down but also leaves their financial liabilities behind.'

He added: 'We've got that bit of destruction to go through and that's a very difficult process to manage if you want to keep growth at fairly decent pace.

'The moment you allow growth to start slowing than the process of unwinding the liabilities becomes much harder and difficult.'

US conundrum

Bond's quantitative screening models also suggest US economic growth could be strong this year, doubling its return in 2013. However, he does not necessarily think this is a good thing for the nation's stockmarket.

He believes the best way to run US exposure is through the exploitation of interest rate movements, which he believes could move higher sooner than consensus opinion anticipates.

'[The trade] we are using is interest rates - we are saying the "Fed is going to be tightening earlier than expected" and we may move that trade by saying the "Fed will tighten rates faster than expected".'

Bond said any decision would be based on the US unemployment rate.

'If unemployment continues to fall at its current pace there's a risk wage inflation picks up in response to this decline and there's a risk that this cycle is not matched in productivity growth. The previous two cycles you had very strong productivity growth, which has kept a lid on overall inflationary pressures.'

Bond also points out investment from the corporate sector could be higher than it has been in previous years, increasing the inflation threat.

For this reason he has kept his exposure to the US stockmarket marginal.

'There's some risk of the strong growth coming through of not being as good for the stockmarket as one might expect.'

Europe surge

One of the biggest convictions in the Odyssey fund is Europe equities, which had a net exposure of 43.5% as at the end of February.

Bond's quant analysis suggests eurozone growth could rise to around 2.8% on annualised basis by the fourth quarter, much higher than expectations.

He believes this growth will be partly powered by the slowdown in the write down of bad bank loans and deleveraging.

'The write off of bad loans is going to slow. We think a lot of these were front-loaded last year to get inside the cut-off point for the ECB inspection.

'Our analysis of business and loan write off cycles in other economies tells us they are more or less coincidental to things like house price inflation, unemployment and GDP and all of those things in every economy in Europe have turned in a manner to tell you bank write offs are going to slow,' Bond said.

'That should feed into net income as write offs, which have been roughly a third of operating costs, normalise again. We are also expecting a pick up in lending, so you would also expect income to rise from that source.'

Since Bond launched the Odyssey fund in October 2011 it has returned 44.9% versus a 40.9% rise in the MSCI World TR Index.

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